How does Silicon Valley work?

How does Silicon Valley work?

July 3, 2012

Most people have heard about Silicon Valley in the USA, but few have any idea about how it works. We will try to unveil this terra incognita.

Silicon Valley stretches and snakes through the State of California, USA – from San Francisco Bay to San Jose – and includes more than 20 settlements. It is a unique place where America's largest electronics and IT corporations are concentrated.

The advanced high-tech centre originated at Stanford University located in Palo Alto. Frederick Terman, who wanted to help bring student ideas to life, is credited with the creation of the Valley. His idea was simple – to let the vacant land in Stanford on a long-term lease to companies engaging in new technological development. Thus, Terman's simple plan solved the important issue of the “brain drain” and provided an incentive for students to start their own businesses in the Valley.

A good example of this idea in practice is the emergence of the corporate giants like Hewlett-Packard, which became the first company to be set up in the Valley. Now Silicon Valley is home to approximately 7 thousand corporations, such as: Adobe Systems, Apple Inc., eBay, Google, Hewlett-Packard, Intel, NetApp, nVIDIA, Oracle Corporation, Yahoo!, and Xerox. It also houses the headquarters and divisions of IBM Almaden Research Center, Microsoft, Opera Software, Siemens, and Sony. The contribution of these corporations cannot be overestimated, since it is here that personal computers, iPhone, iPad, contact lenses, the Hubble space telescope and other great inventions were conceived.

So what is the secret of Silicon's Valley long-term success?

Silicon Valley is like a rich ecosystem in which IT companies thrive, multiply and succeed. The Valley's success is determined by the following factors:

01 Largely temperate climate throughout the year.
02 Powerful scientific and technical background. Thirty-two universities are located here. Besides the most famous Stanford University and the University of California, there are many colleges.
03 A great many offices belonging to high-tech corporations and small- to medium-sized businesses are located here.
04 Availability of financial resources. Silicon Valley houses half of the planet's firms, which operate on venture capital. Another important role is played by the banks investing in stable companies, who in turn produce new innovations.
05 Favourable economic environment in the USA: high-capacity (but stable) economy, low inflation, low income tax. The government places special emphasis on supporting small business. For instance, an Enterprise Zone was established in San Jose, which provides significant tax benefits for startups.
06 Traditions of entrepreneurship based on respect for intellectual property rights and a desire to share one's experience.
07 A well-developed infrastructure: roads, transport, communications and communication facilities.
08 The Valley is a magnet, which attracts the best minds from all corners of the globe.
09 Famous figures and success-stories: Mark Zuckerberg, Steve Jobs, Bill Gates, John McCarthy, Sergey Brin and Larry Page, Len Bosack and Sandy Lerner.
10 A well-developed system of government contracts and investment. Ever since the time of the Cold War, the state has financed approximately 50% of all scientific and research work.
11 Attracting foreign investment. Silicon Valley has dozens of international business incubators with many foreign firms working within the scope of these projects.

Attracting investment to a project


One can find sources of investment in the Valley at any stage – from the conception of an idea to the growth and development stage when a company already has some turnover. When choosing an investor who can bring the greatest possible advantages to a company, one has to consider a number of factors:

  • Has the investor had any experience with similar projects?
  • Does the investor have any competitors in his/her portfolio?
  • What will be the degree of the investor's involvement in the project?
  • Does the investor have any connections that might be helpful in business development?

Today, investors are interested not only in IT technologies, but also in “clean technologies” connected with resource-saving and alternative sources of energy.

The international potential of a company is an essential condition for its consistent, long-term development and provides a guaranteed return on investment. Venture funds will not invest in a regional project because a company's value is highly unlikely to rise quickly when it is limited to a relatively small market.

One should not forget that venture funds try to penetrate new markets and find unique companies. This is why many American venture funds create divisions in Israel, India, China and Russia.